2022 (3) TMI 55 - AT - Insolvency and Bankruptcy

Tribunal upholds decision on interest rate in insolvency case

JM Financial Asset Reconstruction Company Ltd. Versus Mr. Pradeep Kumar Kabra Liquidator For Pacific Pipe Systems Pvt. Ltd.

The Tribunal upheld the Adjudicating Authority's decision, dismissing the Appellant's claim for a higher interest rate. The Liquidator's application of ... Entitlement of interest of 19.40% in terms of 2015 circular - maximum lending rate were defined as 19.75% p.a whereas it has been paid at the ‘Cash Credit’ rate applicable to the utilization of the Cash Credit facilities - direction to ‘admit’ the entire claim at higher rate of interest - HELD THAT:- Letter of Credit is a non-fund based facilities which is not to carry any rate of interest but bank charges of Letter of Credit for issuance commission. When Letter of Credit is debited by the bank and if the fund is not available in the current account of the customer, then in that case, a forced debit is made in the cash credit account / overdraft in the current account of the customer/CD and naturally the rate of interest applicable to the cash credit facilities are made applicable to the Letter of Credit overdue amounts. Accordingly, the ‘Liquidator’ has allowed the rate of interest applicable to the Cash credit facilities to Letter of Credit facilities. It is not a case of providing term loan or other temporary non -fund based facilities to be guided by rates provided in the sanction letter and for Letter of Credit facilities no such rate of interest was provided specifically to be charged at a higher rate of interest of 20% p.a plus penal interest or so. The Appellant being an ‘Assignor’ is only producing the ‘Ledger Account’ of the Karur Vysya Bank who is the ‘Assignor’ of the Agreement and the same is not supported by the requisite authority letters - as per details provided at page 230 of the Appeal paper book the base rate was 9% p.a and that over base rate a spread of 4% p.a. was provided with maximum lending rate of 20% p.a. The Appellant cannot be agreed upon ,that Liquidator has no power to reduce the claim of the Appellant and his duty is only to verify the claim. It is made clear vide Section 39 of the Code that the Liquidator is suppose to verify the claim and Section 35 of the Code empowers it to verify the claims. The available banking practices as also such exorbitant maximum high rate of interest alleged by the Appellant is not justifying the allowing of appeal. Hence, we uphold the order of the Adjudicating Authority dated 04.10.2021 as it does not require any review - Appeal dismissed. Issues Involved:1. Rate of interest applicable to the financial claim.2. Verification and substantiation of claims by the Liquidator.3. Powers and duties of the Liquidator under the Insolvency and Bankruptcy Code, 2016.Issue-Wise Detailed Analysis:1. Rate of Interest Applicable to the Financial Claim:The Appellant, JM Financial Asset Reconstruction Company Limited, contended that the financial asset assigned to them should accrue interest at a rate of 19.40% as per a 2015 circular, whereas the Liquidator applied the rate applicable to Cash Credit facilities. The Appellant argued that the rate should be as per the bank's circulars and sanction letters, specifically citing a maximum lending rate of 20% p.a. plus penal interest. However, the Adjudicating Authority noted that the rate of interest was subject to circulars issued from time to time, which could vary. The Liquidator determined that the interest rate applied by the Appellant was excessively high and not substantiated by adequate documentation or acknowledgment from the Corporate Debtor (CD).2. Verification and Substantiation of Claims by the Liquidator:The Liquidator admitted the Appellant's claim based on the interest rate applicable to working capital loans plus penal interest, rejecting the higher rate claimed by the Appellant. The Liquidator followed the regulations under the IBBI (Liquidation Process) 2016, which require creditors to substantiate their claims with necessary documentation. The Appellant failed to provide sufficient evidence to justify the higher interest rate, such as financial statements or agreements acknowledged by the CD. The Liquidator's decision was based on the lack of corroborative material to support the Appellant's claim for a higher interest rate.3. Powers and Duties of the Liquidator under the Insolvency and Bankruptcy Code, 2016:The Liquidator's role, as defined under Sections 35 and 39 of the Insolvency and Bankruptcy Code, 2016, includes verifying claims and asking for necessary documentation to substantiate them. The Liquidator has the authority to reject or admit claims based on the evidence provided. The Appellant's assertion that the Liquidator could not reduce the claim was refuted, as the Liquidator is empowered to verify and adjust claims as per the regulations. The Tribunal upheld the Liquidator's actions as compliant with the Code and the IBBI regulations.Conclusion:The Tribunal upheld the Adjudicating Authority's order dated 04.10.2021, dismissing the Appellant's claim for a higher interest rate. The Liquidator's decision to apply the interest rate applicable to Cash Credit facilities was deemed appropriate, given the lack of sufficient evidence from the Appellant to justify the higher rate. The Liquidator's actions were in accordance with the powers and duties outlined in the Insolvency and Bankruptcy Code, 2016, and the IBBI regulations. The appeal was dismissed with no order as to costs, and any interim orders were vacated.